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Production and Operations Management: Assignment No: 3

Ski Boards has three options to enter the market quickly with a new ski board finish: (1) refurbish old equipment for $800 with $1.10 per board costs, (2) make modifications for $1,100 with $0.70 per board costs, or (3) buy new equipment for $1,800 with $0.40 per board costs. If Ski Boards can sell 700 boards, refurbishing the old equipment is the cheapest option at $1,570 total cost. Tim Urban is considering outsourcing room cleaning to Duffy's Maid Service. Duffy's charges $18.50 per room plus $25,000, while Tim's

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Production and Operations Management: Assignment No: 3

Ski Boards has three options to enter the market quickly with a new ski board finish: (1) refurbish old equipment for $800 with $1.10 per board costs, (2) make modifications for $1,100 with $0.70 per board costs, or (3) buy new equipment for $1,800 with $0.40 per board costs. If Ski Boards can sell 700 boards, refurbishing the old equipment is the cheapest option at $1,570 total cost. Tim Urban is considering outsourcing room cleaning to Duffy's Maid Service. Duffy's charges $18.50 per room plus $25,000, while Tim's

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Umberto
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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PRODUCTION AND

OPERATIONS MANAGEMENT
ASSIGNMENT NO: 3
PROBLEM 7.6 Ski Boards, Inc., wants to enter the market quickly with a new finish on its ski boards. It
has three choices: (a) Refurbish the old equipment at a cost of $800, (b) make major modifications at a
cost of $1,100, or (c) purchase new equipment at a net cost of $1,800. If the firm chooses to refurbish
the equipment, materials and labor will be $1.10 per board. If it chooses to make modifications,
materials and labor will be $0.70 per board. If it buys new equipment, variable costs are estimated to be
$0.40 per board. Which alternative should Ski Boards, Inc., should choose if it thinks it can sell 700
boards?

SOLUTION

It has three choices:

(a) Refurbish the old equipment for $800.

Materials and labor= $1.10 per board.

(b) make major modifications for $1,100

Materials and labor= $0.70.

(c) purchase new equipment at a net cost of $1,800.

Variable costs= $0.40.

Q= 700

Alternative A= 800+1.10*700= $1570

Alternative B= 1100+0.70*700= $1590

Alternative C= 1800+0.40*700= $2080

The cheapest alternative is Alternative A. To make a full analysis you need the selling price, which we
don't have.  
PROBLEM 7.7 Tim Urban, owner/manager of Urban’s Motor Court in Key West, is considering outsourcing
the daily room cleanup for his motel to Duffy’s Maid Service. Tim rents an average of 50 rooms for each of
365 nights (365 3 50 equals the total rooms rented for the year). Tim’s cost to clean a room is $12.50. The
Duffy’s Maid Service quote is $18.50 per room plus a fixed cost of $25,000 for sundry items such as uniforms
with the motel’s name. Tim’s annual fixed cost for space, equipment, and supplies is $61,000. Which is the
preferred process for Tim, and why?

SOLUTION

Tim’s cost to clean a room is $12.50. The Duffy’s Maid Service quote is $18.50 per room plus a fixed cost of
$25,000 for sundry items such as uniforms with the motel’s name Tim’s annual fixed cost for space,
equipment and supplies is $61,000

Tim= 61,000 + 12.50*x

Duffy= 25,000 + 18.5*x

61,000 + 12.5x= 25,000 + 18.5x

36,000=6x

6,000 = x

The indifference point is 6,000 rooms.

In days= 6,000/50= 120 days

PROBLEM 7.11 Nagle Electric, Inc., of Lincoln, Nebraska, must replace a robotic MiG welder and is
evaluating two alternatives. Machine A has a fixed cost for the first year of $78,000 and a variable cost
of $14, with a capacity of 16,000 units per year. Machine B is slower, with a speed of one-half of A’s, but
the fixed cost is only $57,000. The variable cost will be higher, at $18 per unit. Each unit is expected to
sell for $25.

a) What is the crossover point (point of indifference) in units for the two machines?

b) What is the range of units for which machine A is preferable?

c) What is the range of units for which machine B is preferable?

SOLUTION

(i) 5,250 units

(ii) above 5,250 units

(iii) below 5250 units; 0 and 5249 units


Explanation:

Given,

Machine A

Fixed cost = $78,000

Variable cost = $14

Capacity = 16,000 units

Total cost = Fixed cost + Variable cost × no. of units

Total cost = $78,000 + 14Q

Machine B

Fixed cost = $57,000

Variable cost = $18

Total cost = Fixed cost + Variable cost × no of units

Total cost = $57,000 + 18 Q

a) Cross over point is the point where total cost is equal

Cross over point = Q

$78,000 + 14 Q = $57,000 + 18 Q                    

78,000 – 57,000 = 4Q

21000 = 4Q

Q = 5250 units

Crossover point for the two machines is 5,250 units

b) Machine A is preferable above 5,250 units

Machine A is preferable at a level of production above 5,251 units

c) Machine B is preferable below 5250 units

Machine B is preferable at a level of production 0 and 5249 units

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